An eight-year dispute over massive delays and cost overruns in the construction of a Colombian refinery all but ended late last week in a bankruptcy court in the Southern District of Texas.
In essence, the Houston-based McDermott International Ltd. resolved the dispute by surrendering 19.9 percent of its common equity to Refinería de Cartagena S.A.S. as part of a settlement package valued at more than $900 million.
The settlement, signed Friday by U.S. Bankruptcy Judge Christopher Lopez, ends in Houston a trail of arbitration and litigation that reached from Northern Colombia to courts and commissions in the UK and the Netherlands.
But it also notches a spectacular victory for King & Spalding, led by Austin partner Mike Stenglein, Chicago restructuring partner Matt Warren and disputes partners Tom Sprange and Sarah Walker in London.
“The resolution is one of the more complex disputes in the world for its time,” Stenglein told The Texas Lawbook from his office in Austin Monday. “The result is precedent-setting around the world.”
Stenglein’s comment could be viewed as an understatement.
Aside from the transfer of equity, Reficar will receive draw-down rights on a $95 million letter of credit, retention of the proceeds of another $70 million letter of credit, a $9 million fee recovery and the assignment of rights to pursue $215 million in insurance claims.
The underlying dispute emerged in March 2016 when Refinería de Cartegena, known colloquially as Reficar, initiated arbitration before the International Chamber of Commerce alleging massive cost overruns in the construction of the company’s refinery in northern Colombia.
News of the cost overruns became a scandal in Colombia. Reficar is a subsidiary of Ecopetrol, which though publicly traded, is essentially owned by the Colombian government.
The project was handled by several subsidiaries of Chicago Bridge & Iron: CB&I UK Ltd, McDermott International Holdings BV and Lealand Finance Company BV.
Chicago Bridge & Iron, which moved its administrative operations to The Woodlands in 2001, was acquired by McDermott for $6 billion in May 2018. Along with the company’s assets came considerable debt, as well as the ongoing Reficar dispute.
The refinery opened in 2015 — two years late and by some estimates more than $4 billion over budget. Specifically, Reficar alleged in its arbitration claim that CB&I had botched nearly every phase of the refinery construction, including the engineering, and assessed the cost of those mistakes at $1.7 billion. CB&I, for their part, countered with a claim of $405 million in unpaid bills for work completed.
On June 2, the ICC awarded Reficar $1.008 billion from three subsidiaries of McDermott: . The award included a base of plus interest and expenses accrued beginning Dec. 31, 2015. For the other side, the arbitration panel awarded CB&I a fraction of one percent of their $405 million claim: $914,939 plus $2 million in fees and expenses.
The dispute, however, was far from over. One day later, CB&I moved to vacate the award in the UK and the Netherlands. And subsequently, on Sept 8, the McDermott Group filed restructuring proceedings in the UK and the Netherlands — along with a Chapter 15 proceeding in the Southern District of Texas. Together, these proceedings would have had the effect of discharging the arbitration award with essentially no payment to Reficar.
A key moment, however, was the appointment of an independent restructuring expert in The Netherlands case. It was that expert, said Stenglein, who began to explore the possibility of an exchange of McDermott International equity — an entity technically outside the dispute — as part of a settlement.
“It was a big moment,” Stenglein said. The expert, he said, “began pursuing the agreement through a lot of back and forth.” Various factors driving the agreement became so appealing that it was openly discussed during six days of trial in the Netherlands restructuring case.
“And that is something that doesn’t usually happen,” Stenglein said.
Beyond the duration and complexity of the dispute itself, its resolution has offered an end to what has been a very vexing experience for the officers and employees of Reficar, his clients, who had been viewed in Colombia as being responsible — in some cases even criminally responsible — for the loss of public funds in the refinery development.
“Everything that could go wrong in a project went wrong,” Stenglein said. “It took five years of month-by-month, week-by-week, even day-by-day, analysis of who caused what.” The arbitration ruling, coupled with the ultimate settlement has offered proof — no longer disputed — that the people he had come to know as friends were not responsible for the losses.
“There were times that it felt like the weight of the country was on my shoulder and the shoulder of the entire law firm,” Stenglein said.
“They were not responsible for this cost overrun. This was the exact opposite of that.”
The rest of the King & Spalding’s team included the following core team members: Adam Gray, Harry Burnett, Doak Bishop, Roberto Aguirre Luzi, Matt Vandenberg, Luke Roniger, Jeff Mills, Nate Bilhartz and Luisa Gutierrez Quintero handled the arbitration; and Lindsey Henrikson, Benjamin Jones, Patrick Schumann, Scott Davidson, Michael Handler, Valerie Eliasen, Caspian Heeler, Erin Vandzura, Mark McLennan, Rosie Watterson, Tom Childs, Viva Dadwal, Tamsin Parzen and senior paralegal Lisa Wong handled the restructuring.